More and more investors are interested in CFD trading. This popular form of trading essentially deals with derivatives. CFD trading therefore makes it possible to speculate on the prices, downwards or upwards, of the world financial markets which are experiencing rapid change. CFD trading can therefore relate to FOREX, indices, stocks, treasury bills or even commodities. In this article, how CFDs work will be explained to you in detail. In addition, discover the advantages of this form of trading.
Trading: how do CFDs work?
In the field of trading, the acronym CFD refers to contracts for difference. THE CFD trading therefore means the purchase and/or sale of CFDs or contracts for difference. For you to understand better, the loss or gain of a CFD is estimated by the difference between the position entry price and the position closing price. The CFD therefore makes it possible to speculate on the variations of the financial markets. In other words, you have the option of trading on margin. If you think prices will go down, you can sell (or go short in technical jargon) or alternatively buy (go long) if you think prices will go up.
The benefits of CFD trading
CFD trading is very successful. And for good reason, it offers significant advantages, namely:
- It is an accessible financial instrument, with reduced costs;
- It is possible to sell short when trading CFDs;
- The CFD is accessible to all investor profiles. It is aimed at both retail traders and professionals. Anyone over the age of 18 can trade CFDs. In addition, no specific diploma is required to invest in this financial instrument;
- From a tax perspective, CFDs are advantageous. There is no stamp duty to pay. However, it is important to clarify that the tax treatment granted to a trader depends on certain individual circumstances of the latter and may vary from one jurisdiction to another.
You should know that CFD trading is mainly done OTC (Over The Counter), that is to say off-exchange, unlike other financial instruments which are traded directly on the financial market.
Understanding CFD Trading
When you trade CFDs you are not buying or selling the underlying asset which may be a stock, currency pair, precious metal or commodity. You actually buy and sell a certain number of units, representing the financial instrument in which you wish to invest. CFDs are therefore accessible on most global markets and cover a wide range of instruments.
In the event that the price of the instrument moves in your favor, then you earn one or more multiples of the number of CFD units you sold or bought. If, on the other hand, the price moves against you, you will find yourself losing.
What are the costs of trading CFDs?
Trading CFDs has different costs that you should be aware of before you get started.
The spread
In online trading in general, investors have to pay what is commonly known as the spread. It is simply the difference between the buy price and the sell price of the instrument. The smaller the gap or spread, the less the price will have to move in your favor for you to start generating profits.
Financing costs
At the end of each trading day, the funding charge is applied to any position held in your trading account. This data can be negative or positive, depending on the direction of your position and also the financing rate.
The Commission
The commission is generally applicable on shares. It varies from one trading platform to another, from financial market to another.
In summary, CFD trading offers investors many benefits including lower fees and tax benefits among other things. To trade safely, choose a reliable and legal trading platform that offers an advantageous spread.